Quantitative Easing Saved $1 Trillion in Debt

November 19, 2013

A new report from the McKinsey Global Institute finds that the U.S. government has saved more than $1 trillion in debt since 2007 because of the actions taken by the Federal Reserve to stimulate the economy, says the Washington Examiner.

The government profited by being able to issue Treasury debt that pays lower interest rates.

By keeping short-term rates near zero and engaging in large-scale asset purchases known as quantitative easing, the Fed also boosted U.S. banks' net interest income by $150 billion.

The effective rate on outstanding U.S. debt fell from 4.8 percent in 2007 to 2.4 percent in 2012, saving the Treasury $900 billion in interest payments over that time.

Meanwhile, by allowing big banks to borrow at near zero interest rates and lend out at higher rates, the Fed's zero-rate policies have helped banks' bottom lines.

In addition to creating winners, quantitative easing and zero rates have also created losers.

American households missed out on $360 billion in net interest income.

Americans age 75 and older, according to the report, "lost an average of $2,700 a year in income."

By inflating home and bond prices, however, the Fed's stimulus efforts lifted household wealth in the United States by up to $5.6 trillion, the study estimates. That run-up in wealth also translated to roughly $167 billion in added consumer spending in 2012, aiding the broader economy. Those effects, the study's authors estimate, "far outweigh the income lost to households."

The Fed's balance sheet has grown from less than $900 billion in assets just before the crisis in 2008 to nearly $4 trillion today. It is currently purchasing $85 billion every month in Treasury and mortgage-backed securities, and is expected to slowly reduce that amount throughout next year. Fed officials have indicated that they anticipate keeping short-term interest rates near zero through 2015.